# UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington D.C. 20549

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FORM 10-Q

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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007

Commission File Number 0-20050

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PRINCETON NATIONAL BANCORP, INC.
(Exact name of registrant as specified in its charter)

|Delaware                                                      | 36-3210283                          
|------------------------------------------------------------- | ------------------------------------
|(State or other jurisdictionof incorporation or organization) | (I.R.S. Employer Identification No.)

606 S. Main Street, Princeton, IL 61356
(Address of principal executive offices and Zip Code)

(815) 875-4444
(Registrants telephone number, including area code)

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



YesxNo o



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.



Large accelerated filer
        oAccelerated filer
        xNon-accelerated filer
        o




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



YesoNo x



As of April 17, 2007, the registrant had outstanding 3,342,423 shares of its $5 par value common stock.





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Part I: FINANCIAL INFORMATION



The unaudited consolidated financial statements of Princeton National Bancorp, Inc. and Subsidiary and managements discussion and analysis of financial condition and results of operation are presented in the schedules as follows:



Schedule 1:
        Consolidated Balance Sheets


Schedule 2:
        Consolidated Statements of Income and Comprehensive Income


Schedule 3:
        Consolidated Statements of Stockholders Equity


Schedule 4:
        Consolidated Statements of Cash Flows


Schedule 5:
        Notes to Consolidated Financial Statements


Schedule 6:
        Managements Discussion and Analysis of Financial Condition and Results of Operations


Schedule 7:
        Controls and Procedures








Part II: OTHER INFORMATION



Item 1A. Risk Factors



In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Corporation. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.





2

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds



(c)
        The following table provides information about purchases of the Corporations common stock by the Corporation during the quarter ended March 31, 2007:




Period
        
        (a) Total number ofshares purchased
        
        (b) Average price paidper share
        
        (c) Total numberof shares purchasedas part ofpublicly announcedplans or programs
        
        (d) Maximum number(or approximate dollarvalue) of shares thatmay yet be purchasedunder the plans orprograms1/1/07 -1/31/07
        
        0
        
        $
        0.00
        
        0
        
        40,0002/1/07 -2/28/07
        
        10,000
        
        $
        32.00
        
        10,000
        
        30,0003/1/07  3/31/07
        
        0
        
        $
        0.00
        
        0
        
        30,000Total
        
        10,000
        
        $
        32.00
        
        10,000
        
        30,000




On April 25, 2006, the Board of Directors approved the repurchase of up to an aggregate of 100,000 shares of our common stock pursuant to a repurchase program announced the same day (the Program). The expiration date of this Program is April 25, 2007. Unless terminated earlier by resolution of our Board of Directors, the Program will expire on the earlier of such expiration date or when we have repurchased all shares authorized for repurchase under the Program.



Item 6. Exhibits



31.1
        Certification of Tony J. Sorcic required by Rule 13a-14(a).31.2
        Certification of Todd D. Fanning required by Rule 13a-14(a).32.1
        Certification of Tony J. Sorcic required by Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.32.2
        Certification of Todd D. Fanning required by Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.






SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



PRINCETON NATIONAL BANCORP, INC.





By:
        /s/   Tony J. Sorcic
        
        By:
        /s/   Todd D. FanningTony J. SorcicPresident & Chief Executive OfficerMay 7, 2007
        
        
        Todd D. FanningSr. VP & Chief Financial OfficerMay 7, 2007






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Schedule 1



PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)



March 31,2007(unaudited)
        
        December 31,2006ASSETSCash and due from banks
        
        $
        19,192
        
        $
        33,882Interest-bearing deposits with financial institutions
        
        
        168
        
        
        103Federal funds sold
        
        
        5,700
        
        
        5,200Total cash and cash equivalents
        
        
        25,060
        
        
        39,185Loans held for sale, at lower of cost or market
        
        
        1,577
        
        
        4,512Investment securities:Available-for-sale, at fair value
        
        
        238,517
        
        
        252,467Held-to-maturity, at amortized cost (fair value of $16,068 and $15,567)
        
        
        15,946
        
        
        15,449Total investment securities
        
        
        254,463
        
        
        267,916Loans:Loans, net of unearned interest
        
        
        656,748
        
        
        629,472Allowance for loan losses
        
        
        (3,137
        )
        
        (3,053
        )Net loans
        
        
        653,611
        
        
        626,419Premises and equipment, net of accumulated depreciation
        
        
        31,938
        
        
        28,670Land held for sale, at lower of cost or market
        
        
        1,344
        
        
        0Bank-owned life insurance
        
        
        21,810
        
        
        21,470Accrued interest receivable
        
        
        8,882
        
        
        11,139Goodwill
        
        
        24,521
        
        
        23,029Intangible assets, net of accumulated amortization
        
        
        5,731
        
        
        5,921Other real estate owned
        
        
        482
        
        
        0Other assets
        
        
        3,994
        
        
        3,698TOTAL ASSETS
        
        $
        1,033,413
        
        $
        1,031,959LIABILITIESDeposits:Demand
        
        $
        100,835
        
        $
        107,834Interest-bearing demand
        
        
        238,061
        
        
        231,953Savings
        
        
        121,274
        
        
        116,246Time
        
        
        423,882
        
        
        425,866Total deposits
        
        
        884,052
        
        
        881,899Borrowings:Customer repurchase agreements
        
        
        29,608
        
        
        31,344Advances from the Federal Home Loan Bank
        
        
        6,973
        
        
        6,970Interest-bearing demand notes issued to the U.S. Treasury
        
        
        1,193
        
        
        2,333Trust Preferred securities
        
        
        25,000
        
        
        25,000Note payable
        
        
        10,500
        
        
        8,500Total borrowings
        
        
        73,274
        
        
        74,147Other liabilities
        
        
        10,273
        
        
        10,558TOTAL LIABILITIES
        
        
        967,599
        
        
        966,604STOCKHOLDERS EQUITYCommon stock: $5 par value, 7,000,000 shares authorized; 4,478,295 issued at March 31, 2007 and December 31, 2006
        
        
        22,391
        
        
        22,391Surplus
        
        
        18,183
        
        
        18,158Retained earnings
        
        
        48,634
        
        
        48,109Accumulated other comprehensive loss, net of tax
        
        
        (748
        )
        
        (960
        )Less: Cost of 1,135,872 and 1,126,885 treasury shares at March 31, 2007 and December 31, 2006, respectively
        
        
        (22,646
        )
        
        (22,343
        )TOTAL STOCKHOLDERS EQUITY
        
        
        65,814
        
        
        65,355TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
        
        $
        1,033,413
        
        $
        1,031,959




See accompanying notes to unaudited consolidated financial statements



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Schedule 2



PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(dollars in thousands, except share data)



For the Three MonthsEnded March 312007
        
        2006Interest income:Interest and fees on loans
        
        $
        11,607
        
        $
        9,744Interest on investment securities:Taxable
        
        
        1,885
        
        
        1,374Non-taxable
        
        
        1,128
        
        
        1,177Interest on federal funds sold
        
        
        147
        
        
        14Interest on interest-bearing time deposits in other banks
        
        
        50
        
        
        4Total interest income
        
        
        14,817
        
        
        12,313Interest expense:Interest on deposits
        
        
        7,478
        
        
        4,854Interest on borrowings
        
        
        947
        
        
        930Total interest expense
        
        
        8,425
        
        
        5,784Net interest income
        
        
        6,392
        
        
        6,529Provision for loan losses
        
        
        185
        
        
        10Net interest income after provision for loan losses
        
        
        6,207
        
        
        6,519Non-interest income:Trust & farm management fees
        
        
        414
        
        
        405Service charges on deposit accounts
        
        
        990
        
        
        997Other service charges
        
        
        461
        
        
        390Gain on sales of securities available-for-sale
        
        
        47
        
        
        60Gain on sale of loans
        
        
        0
        
        
        90Brokerage fee income
        
        
        203
        
        
        144Mortgage banking income
        
        
        272
        
        
        186Bank-owned life insurance income
        
        
        196
        
        
        186Other operating income
        
        
        62
        
        
        41Total non-interest income
        
        
        2,645
        
        
        2,499Non-interest expense:Salaries and employee benefits
        
        
        4,180
        
        
        4,032Occupancy
        
        
        602
        
        
        471Equipment expense
        
        
        779
        
        
        705Federal insurance assessments
        
        
        85
        
        
        79Intangible assets amortization
        
        
        188
        
        
        163Data processing
        
        
        272
        
        
        305Advertising
        
        
        173
        
        
        195Other operating expense
        
        
        994
        
        
        1,132Total non-interest expense
        
        
        7,273
        
        
        7,082Income before income taxes
        
        
        1,579
        
        
        1,936Income tax expense
        
        
        150
        
        
        286Net income
        
        $
        1,429
        
        $
        1,650Earnings per share:Basic
        
        
        0.43
        
        
        0.49Diluted
        
        
        0.42
        
        
        0.49Basic weighted average shares outstanding
        
        
        3,347,099
        
        
        3,362,332Diluted weighted average shares outstanding
        
        
        3,363,959
        
        
        3,385,248




See accompanying notes to unaudited consolidated financial statements

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Schedule 2



PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(dollars in thousands)



For the Three MonthsEnded March 312007
        
        2006Net income
        
        $
        1,429
        
        $
        1,650Other comprehensive income (loss), net of taxUnrealized holding gains (losses) arising during the period, net of tax
        
        
        237
        
        
        (862
        )Less: Reclassification adjustment for realized gains on sales of securities included in net income, net of tax
        
        
        (29
        )
        
        (37
        )Plus: Amortization of transition obligation of post retirement healthcare continuation
        
        
        4
        
        
        0Other comprehensive income (loss)
        
        
        212
        
        
        (899
        )Comprehensive income
        
        $
        1,641
        
        $
        751




See accompanying notes to unaudited consolidated financial statements



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Schedule 3



PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Unaudited)

(dollars in thousands except per share data)



For the Three Months EndedMarch 31, 2007
        CommonStock
        
        Surplus
        
        RetainedEarnings
        
        AccumulatedOtherComprehensiveLoss,net of tax effect
        
        TreasuryStock
        
        TotalBalance, January 1, 2007
        $
        22,391
        
        $            18,158
        
        $
        48,109
        
        $
        (960
        )
        $
        (22,343
        )
        $
        65,355Net income
        
        
        
        
        
        
        1,429
        
        
        
        
        
        
        
        
        1,429Sale of 1,013 sharesof treasury stock
        
        
        
        13
        
        
        
        
        
        
        
        
        17
        
        
        30Purchase of 10,000 sharesof treasury stock
        
        
        
        
        
        
        
        
        
        
        
        
        (320
        )
        
        (320
        )Cash dividends$(.27 per share)
        
        
        
        
        
        
        (904
        )
        
        
        
        
        
        
        
        (904
        )Stock option compensation expense
        
        
        
        12
        
        
        
        
        
        
        
        
        
        
        
        12Other comprehensive income,net of $134 tax effect
        
        
        
        
        
        
        
        
        
        212
        
        
        
        
        
        212Balance, March 31, 2007
        $
        22,391
        
        $            18,183
        
        $
        48,634
        
        $
        (748
        )
        $
        (22,646
        )
        $
        65,814For the Three Months EndedMarch 31, 2006Balance, January 1, 2006
        $
        22,392
        
        16,968
        
        $
        45,786
        
        $
        (482
        )
        $
        (21,520
        )
        $
        63,144Net income
        
        
        
        
        
        
        1,650
        
        
        
        
        
        
        
        
        1,650Exercise of stock options andre-issuance of treasurystock (48,351 shares)
        
        
        
        867
        
        
        (480
        )
        
        
        
        
        918
        
        
        1,305Cash dividends$(.24 per share)
        
        
        
        
        
        
        (805
        )
        
        
        
        
        
        
        
        (805
        )Other comprehensive loss,net of $626 tax effect
        
        
        
        
        
        
        
        
        
        (899
        )
        
        
        
        
        (899
        )Balance, March 31, 2006
        $
        22,392
        
        $            17,835
        
        $
        46,151
        
        $
        (1,381
        )
        $
        (20,602
        )
        $
        64,395








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Schedule 4



PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(dollars in thousands)



For the Three Months EndedMarch 312007
        
        2006Operating activities:Net income
        
        $
        1,429
        
        $
        1,650Adjustments to reconcile net income to netcash provided by operating activities:Depreciation
        
        
        613
        
        
        531Provision for loan losses
        
        
        185
        
        
        10Amortization of other intangible assets and purchase accounting adjustments
        
        
        188
        
        
        163Amortization of premiums and discounts on investment securities
        
        
        (84
        )
        
        189Gain on sales of securities, net
        
        
        (47
        )
        
        (60
        )Gain on sale of loans
        
        
        0
        
        
        (90
        )FHLB stock dividends
        
        
        0
        
        
        (24
        )Loans originated for sale
        
        
        (7,481
        )
        
        (10,495
        )Proceeds from sales of loans originated for sale
        
        
        10,416
        
        
        9,556Increase in accrued interest payable
        
        
        240
        
        
        154Decrease in accrued interest receivable
        
        
        2,257
        
        
        1,295Increase in other assets
        
        
        (1,019
        )
        
        (13,125
        )Decrease in other liabilities
        
        
        (798
        )
        
        (2,457
        )Net cash provided by (used in) operating activities
        
        
        5,899
        
        
        (12,703
        )Investing activities:Proceeds from sales of investment securities available-for-sale
        
        
        5,018
        
        
        4,004Proceeds from maturities of investment securities available-for-sale
        
        
        15,380
        
        
        11,086Purchase of investment securities available-for-sale
        
        
        (6,044
        )
        
        (2,598
        )Proceeds from maturities of investment securities held-to-maturity
        
        
        645
        
        
        852Purchase of investment securities held-to-maturity
        
        
        (1,075
        )
        
        (1,080
        )Proceeds from sale of loans
        
        
        0
        
        
        16,590Net increase in loans
        
        
        (10,334
        )
        
        (1,699
        )Purchases of premises and equipment
        
        
        (725
        )
        
        (1,504
        )Payment related to acquisition, net of cash and cash equivalents
        
        
        (10,110
        )
        
        0Net cash (used in) provided by investing activities
        
        
        (7,245
        )
        
        25,651Financing activities:Net decrease in deposits
        
        
        (10,712
        )
        
        (10,526
        )Net decrease in borrowings
        
        
        (873
        )
        
        (4,665
        )Dividends paid
        
        
        (904
        )
        
        (805
        )Purchases of treasury stock
        
        
        (320
        )
        
        0Exercise of stock options and issuance of treasury stock
        
        
        0
        
        
        1,305Sales of treasury stock
        
        
        30
        
        
        0Net cash used in financing activities
        
        
        (12,779
        )
        
        (14,691
        )Decrease in cash and cash equivalents
        
        
        (14,125
        )
        
        (1,743
        )Cash and cash equivalents at beginning of period
        
        
        39,185
        
        
        23,745Cash and cash equivalents at March 31
        
        $
        25,060
        
        $
        22,002Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
        
        $
        8,185
        
        $
        5,630Income taxes
        
        $
        680
        
        $
        125Supplemental disclosures of non-cash flow activities:Loans transferred to other real estate owned
        
        $
        482
        
        $
        7Land transferred to held for sale
        
        $
        1,344
        
        $
        0




See accompanying notes to unaudited consolidated financial statements



8

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Schedule 5



PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)



The accompanying unaudited condensed consolidated financial statements reflect all adjustments, which, in the opinion of management, are necessary for a fair presentation of the results of the interim periods ended March 31, 2007 and 2006, and all such adjustments are of a normal recurring nature.  The 2006 year-end consolidated balance sheet data was derived from audited financial statements, but do not include all disclosures required by generally accepted accounting principles.



The unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information required by accounting principles generally accepted in the United States of America for complete financial statements and related footnote disclosures.  In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered for a fair presentation of the results for the interim period have been included.  For further information, refer to the consolidated financial statements and notes included in the Registrant's 2006 Annual Report on Form 10-K.  Results of operations for interim periods are not necessarily indicative of the results that may be expected for the year.  Certain amounts in the 2006 consolidated financial statements have been reclassified to conform to the 2007 presentation.



(1)  EARNINGS PER SHARE CALCULATION



The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (in thousands, except share data):





Three Months EndedMarch 31,2007
        
        2006Numerator:Net income
        
        $
        1,429
        
        $
        1,650Denominator:Basic earnings per shareweighted average shares
        
        
        3,347,099
        
        
        3,362,332Effect of dilutive securitiesstock options
        
        
        16,860
        
        
        22,916Diluted earnings per shareadjusted weighted average shares
        
        
        3,363,959
        
        
        3,385,248Net income per share:Basic
        
        $
        0.43
        
        $
        0.49Diluted
        
        $
        0.42
        
        $
        0.49






The earnings per share calculation for the three months ended, March 31, 2007 and 2006 does not include 160,283 shares and 76,500 shares, respectively, which were anti-dilutive.



9

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(2) ACQUISITION



On February 23, 2007, the Corporation completed the acquisition of the Plainfield office of HomeStar Bank in Manteno, Illinois, for $10.2 million in cash, including goodwill of $1.5 million, in order to expand its market presence in the area.  The Corporation purchased the existing facility for $4.5 million plus $17.0 million in loans (at book value) and assumed $12.9 million in deposit liabilities.  The Plainfield office operates as a branch of the subsidiary bank.



The transaction has been accounted for as a purchase, and the results of operations of the Plainfield office since the acquisition date have been included in the consolidated financial statements. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of this transaction (in thousands):



Cash and cash equivalents
        
        $
        93Loans
        
        
        17,043Premises and equipment
        
        
        4,500Goodwill
        
        
        1,492Other assets
        
        
        85Total assets acquired
        
        
        23,213Deposits
        
        
        12,865Other liabilities
        
        
        145Total liabilities assumed
        
        
        13,010Net assets acquired
        
        $
        10,203




Transaction costs related to the completion of the transaction were considered immaterial. The total fair value of the assets and liabilities acquired exceeded the book value, resulting in goodwill of $1,492, which is not subject to amortization. The goodwill is deductible for tax purposes.



The following unaudited pro forma condensed combined financial information presents the results of operations of the Corporation, including the effects of the purchase accounting adjustments, had the acquisition taken place at the beginning of each period (in thousands):





10

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|                                            | For the three monthsendedMarch 31, 2007 |  | For the three monthsendedMarch 31, 2006
|------------------------------------------- | --------------------------------------- |  | ---------------------------------------
|Net interest income                         |                                         |  | $                                      
|Provision for loan losses                   |                                         |  |                                        
|Non-interest income                         |                                         |  |                                        
|Non-interest expense                        |                                         |  |                                        
|                                            |                                         |  |                                        
|                                           
|Income before income taxes                  |                                         |  |                                        
|Income tax expense                          |                                         |  |                                        
|                                            |                                         |  |                                        
|                                           
|Net income                                  |                                         |  | $                                      
|                                            |                                         |  |                                        
|                                           
|Earnings per share                          |                                         | 
|Basic                                       |                                         |  | $                                      
|Diluted                                     |                                         |  | $                                      
|                                           
|Basic weighted average shares outstanding   |                                         |  |                                        
|Diluted weighted average shares outstanding |                                         |  |                                        

The unaudited pro forma
condensed combined financial statements do not reflect any anticipated cost savings and revenue enhancements. Additionally, the
income statement for the first three months of 2007 includes merger-related expenses. Accordingly, the pro forma results of
operations of the Corporation as of and after the merger may not be indicative of the results that actually would have occurred if
the merger had been in effect during the periods presented or of the results that may be attained in the future.

# (3) GOODWILL AND INTANGIBLE ASSETS

The balance of goodwill, net
of accumulated amortization, totaled $24,521,000 at March 31, 2007 and $23,029,000 at December 31, 2006, with the increase of
$1,492,000 resulting from the acquisition of the Plainfield branch of HomeStar Bank in February, 2007. The balance of intangible
assets, net of accumulated amortization, totaled $5,731,000 and $5,921,000 at March 31, 2007 and December 31, 2006, respectively.

The following table
summarizes the Corporations intangible assets, which are subject to amortization, as of March 31, 2007 and December 31,
2006.

11

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|(in thousands)          | 2007 |  | 2006
|----------------------- | ---- |  | ----
|
|Core deposit intangible |      |  | $   
|Other intangible assets |      |  |     
|                        |      |  |     
|Total                   |      |  | $   
|                        |      |  |     

Amortization expense of all
intangible assets totaled $188,000 for the three months ended March 31, 2007 and $163,000 for the three months ended March 31,
2006, respectively. The amortization expense of these intangible assets will be approximately $175,000 for the each of the
remaining quarters in 2007.

The Corporation has
originated mortgage servicing rights which are included in other assets on the consolidated balance sheets. Mortgage servicing
rights are amortized in proportion to, and over the period of, estimated net servicing income on a basis similar to the interest
method using an accelerated amortization method and are subject to periodic impairment testing. As of March 31, 2007, no
impairment had been recorded during the year. Changes in the carrying value of capitalized mortgage servicing rights are
summarized as follows:

|(in thousands)                   | 
|-------------------------------- | 
|Balance, January 1, 2007         | 
|Servicing rights capitalized     | 
|Amortization of servicing rights | 
|Impairment of servicing rights   | 
|Balance, March 31, 2007          | 
|                                 | 

The Corporation services
loans for others with unpaid principal balances at March 31, 2007 and December 31, 2006 of approximately $245,117,000, and
$236,893,000, respectively.

The following table shows the
future estimated amortization expense for mortgage servicing rights based on existing balances as of March 31, 2007. The
Corporations actual amortization expense in any given period may be significantly different from the estimated amounts
displayed depending on the amount of additional servicing rights, changes in mortgage interest rates, actual prepayment speeds,
and market conditions.

# Estimated Amortization Expense:

|                                            | Amount (in thousands)
|------------------------------------------- | ---------------------
|For the nine months ended December 31, 2007 |                      
|For the year ended December 31, 2008        |                      
|For the year ended December 31, 2009        |                      
|For the year ended December 31, 2010        |                      
|For the year ended December 31, 2011        |                      
|For the year ended December 31, 2012        |                      
|Thereafter                                  |                      

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# (4) FDIC ONE-TIME ASSESSMENT CREDIT

Effective November 17, 2006,
the FDIC implemented a one-time credit of $4.7 billion to eligible institutions. The purpose of the credit is to recognize
contributions made by certain institutions to capitalize the Bank Insurance Fund and Savings Association Insurance Fund, which
have now been merged into the Deposit Insurance Fund. The Bank is an eligible institution and has now received notice from the
FDIC that its share of the credit is $647. This amount is not reflected in the accompanying financial statements as it represents
contingent future credits against future insurance assessment payments. As such, the timing and ultimate recoverability of the
one-time credit may change.

# (5) IMPACT OF NEW ACCOUNTING STANDARDS

The Corporation adopted the
provisions of FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, on January
1, 2007. The implementation of FIN 48 did not impact the Corporations financial statements. The Corporation files income tax
returns in the U.S. federal jurisdiction and state of Illinois jurisdiction. The Corporation is no longer subject to U.S. federal
or state income tax examinations by tax authorities for years before 2003.

In September 2006, FASB
issued SFAS No. 157 (FAS 157), Fair Value Measurements, which provides enhanced guidance for using fair value to
measure assets and liabilities. FAS 157 establishes a common definition of fair value, provides a framework for measuring fair
value under U.S. GAAP and expands disclosures requirements about fair value measurements. FAS 157 is effective for financial
statements issued in fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Corporation
is currently evaluating the impact, if any, the adoption of FAS 157 will have on its financial reporting and disclosures.

In September 2006, the FASB
issued SFAS No. 158 (FAS 158), Employers Accounting for Defined Benefit Pension and Other Postretirement Plans 
an amendment of FASB Statements 87, 88, 106, and 132 (R), which requires recognition of a net liability or asset to report
the funded status of defined benefit pension and other postretirement plans on the balance sheet and recognition (as a component
of other comprehensive income) of changes in the funded status in the year in which the changes occur. Additionally, FAS 158
requires measurement of a plans assets and obligations as of the balance sheet date and additional annual disclosures in the
notes to the financial statements. The recognition and disclosure provisions of FAS 158 were adopted during 2006, while the
requirement to measure a plans assets and obligations as of the balance sheet date is effective for fiscal years ending
after December 15, 2008. The Corporation does not expect the adoption of the measurement provisions to have a material impact on
its financial reporting and disclosures.

In September 2006, the FASB
ratified Emerging Issues Task Force No.  06-4, Postretirement Benefits Associated with Split-Dollar Life
Insurance (EITF 06-4). EITF 06-4 requires deferred-compensation or postretirement benefit aspects of an endorsement-type
split-dollar life insurance arrangement to be recognized as a liability by the employer and the obligation is not effectively
settled by the purchase of a life insurance policy. The liability for future benefits should be recognized based on the
substantive agreement with the employee, which may be either to provide a future death benefit or to pay for the future cost of
the life insurance. EITF 06-4 is effective for fiscal years beginning after December 15, 2007. The Corporation is currently
evaluating the impact, if any, the adoption of EITF 06-4 will have on its financial reporting and disclosures.

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In February 2007, the FASB
issued SFAS No. 159 (FAS 159), The Fair Value Option for Financial Assets and Financial Liabilities  Including an
amendment of FASB Statement No. 115".  FAS 159 allows companies to report selected financial assets and
liabilities at fair value. The changes in fair value are recognized in earnings and the assets and liabilities measured under this
methodology are required to be displayed separately in the balance sheet. The main intent of the Statement is to mitigate the
difficulty in determining reported earnings caused by a mixed-attribute model (or reporting some assets at fair value
and others using a different valuation attribute such as amortized cost). The project is separated into two phases.  This
first phase addresses the creation of a fair value option for financial assets and liabilities.  A second phase will address
creating a fair value option for selected non-financial items. FAS 159 is effective for all financial statements issued for
fiscal years beginning after November 15, 2007.  The Corporation is currently evaluating the impact, if any, the
adoption of FAS 159 will have on its financial reporting and disclosures.

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Schedule 6



PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the three months ended March 31, 2007 and 2006



The following discussion provides information about Princeton National Bancorp, Inc.s (PNBC or the Corporation) financial condition and results of operations for the quarters ended March 31, 2007 and 2006. This discussion should be read in conjunction with the attached consolidated financial statements and notes thereto. Certain statements in this report constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, but not limited to those statements that include the words believes, expects, anticipates, estimates, or similar expressions. PNBC cautions that such forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those expressed or
implied. Such risks and uncertainties include potential change in interest rates, competitive factors in the financial services industry, general economic conditions, the effect of new legislation, and other risks detailed in documents filed by the Corporation with the Securities and Exchange Commission from time to time.



RESULTS OF OPERATIONS



Net income for the first quarter of 2007 was $1,429,000, or basic earnings per share of $0.43 and diluted earnings per share of $0.42, as compared to net income of $1,650,000 in the first quarter of 2006, or basic earnings and diluted earnings per share of $0.49. This represents a decrease of $221,000 (13.4%) or $.06 per basic share and $.07 per diluted share. The lower net income figure is attributable to a decrease in the net tax equivalent yield on interest-earning assets from 3.52% for the first quarter of 2006 to 3.11% in the first quarter of 2007, which is discussed in the paragraph below, along with one-time expenses incurred in relation to the acquisition of the Plainfield office, deposits and loans of approximately $100,000. The annualized return on average assets and return on average equity were 0.57% and 8.80%, respectively, for the first quarter of 2007, compared with 0.72% and
10.54% for the first quarter of 2006.



Net interest income before the provision for loan losses was $6,392,000 for the first quarter of 2007, compared to $6,529,000 for the first quarter of 2006 (a decrease of $137,000 or 2.1%). Although there has been an increase in average interest-earning assets of $85.4 million over the past twelve months, the resulting net yield on interest-earning assets (on a fully taxable equivalent basis) decreased to 3.11% in the first quarter of 2007 from 3.52% in the first quarter of 2006, causing the decrease to net income reported above. As interest rates continued to rise over the past year, the yield on interest-earning assets (increased 50 basis points) has not been able to keep pace with the rising cost of interest-bearing liabilities (increased 94 basis points). A further increase to the
cost of interest-bearing liabilities has occurred because more deposits are moving into time deposits versus lower-costing interest-bearing demand deposits.





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The Corporations provision for loan loss expense recorded each quarter is determined by managements evaluation of the risk characteristics of the loan portfolio. For the first quarter of 2007, PNBC had net charge-offs of $101,000, compared to net charge-offs of $109,000 for the first quarter of 2006. PNBC recorded a loan loss provision of $185,000 in the first quarter of 2007 compared to a provision of $10,000 in the first quarter of 2006.



Non-interest income totaled $2,645,000 for the first quarter of 2007, compared to $2,499,000 in the first quarter of 2006, an increase of $146,000 (or 5.8%). The categories of mortgage banking income, other service charges and brokerage fee income recorded the largest increases of $86,000, $71,000 and $59,000, respectively, due to increases in the volume of transactions. The Corporation recorded gains from the sales of securities available-for-sale of $47,000 in the first three months of 2007 compared to $60,000 for the first three months of 2006. Annualized non-interest income as a percentage of total average assets decreased slightly from 1.09% for the first three months of 2006, to 1.05% for the same period in 2007.



Total non-interest expense for the first quarter of 2007 was $7,273,000, an increase of $191,000 (or 2.7%) from $7,082,000 in the first quarter of 2006. Contributing to the difference was an increase in salaries/employee benefits of $148,000 due to an increase in the number of full-time employees. Smaller increases were seen in the categories of occupancy and equipment expense, increasing $131,000 and $74,000, respectively, caused by the additional offices in Aurora and Plainfield in the past twelve months. Offsetting these increases were decreases in other operating expense, data processing and advertising which decreased $138,000, $33,000 and $22,000, respectively. Annualized non-interest expense as a percentage of total average assets decreased to 2.89% for the first three months of 2007, compared to 3.09% for the same period in 2006.



INCOME TAXES



Income tax expense totaled $150,000 for the first quarter of 2007, as compared to $286,000 for the first quarter of 2006. The effective tax rate was 9.5% for the three month period ended March 31, 2007 and 14.8% for the three month period ended March 31, 2006. The lower effective tax rate in 2007 is due to the amount of tax-exempt investment securities in the Corporations investment portfolio as well as a lower pre-tax income.



The Corporation adopted the provisions of FASB Interpretation No. 48 (FIN 48),Accounting for Uncertainty in Income Taxes,on January 1, 2007. The implementation of FIN 48 did not impact the Corporations financial statements. The Corporation files income tax returns in the U.S. federal jurisdiction and state of Illinois jurisdiction. The Corporation is no longer subject to U.S. federal or state income tax examinations by tax authorities for years before 2003.



ANALYSIS OF FINANCIAL CONDITION



Total assets at March 31, 2007 increased to $1,033,413,000 from $1,031,959,000 at December 31, 2006 (an increase of $1.5 million or 0.1%). Investment balances totaled $254,463,000 at March 31, 2007, compared to $267,916,000 at December 31, 2006 (a decrease of $13.5 million or 5.0%). The decrease in the investment portfolio is a result of managements decision to fund new loans with maturing investments rather than be overly competitive with the rising price of deposits. Accordingly, total deposits increased only slightly to $884,052,000 at March 31, 2007 from $881,899,000 at December 31, 2006 (an increase of $2.2 million or 0.2%). This increase includes $13.1 million in deposits acquired from the



16

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Plainfield acquisition. Comparing categories of deposits at March 31, 2007 to December 31, 2006, interest-bearing demand deposits increased $6.1 million (or 2.6%) and savings deposits increased
$5.0 million (or 4.3%). Conversely, time deposits decreased by $2.0 million (or 0.5%) and demand deposits decreased $7.0 million (or 6.5%). Borrowings, consisting of customer repurchase agreements, notes payable, treasury, tax, and loan (TT&L) deposits, and Federal Home Loan Bank advances, decreased from $74,147,000 at December 31, 2006 to $73,274,000 at March 31, 2007 (a decrease of $873,000 or 1.2%).



Loan balances, net of unearned interest, increased to $656,748,000 at March 31, 2007, compared to $629,472,000 at December 31, 2006 (an increase of $27.3 million or 4.3%). This increase is mainly the result of the $16.8 million in loans purchased in the aforementioned Plainfield acquisition. Non-performing loans increased to $4,909,000 or 0.75% of net loans at March 31, 2007, as compared to $4,519,000 or 0.80% of net loans at December 31, 2006. Although non-performing loans have increased in terms of total dollars, all are individually evaluated and management continues to maintain adequate reserves in the allowance for loan losses.



ASSET QUALITY



For the three months ended March 31, 2007, the subsidiary bank charged off $176,000 of loans and had recoveries of $75,000, compared to charge-offs of $148,000 and recoveries of $39,000 during the three months ended March 31, 2006. The allowance for loan losses is based on factors that include the overall composition of the loan portfolio, types of loans, underlying collateral, past loss experience, loan delinquencies, substandard and doubtful credits, and such other factors that, in managements reasonable judgment, warrant consideration. The adequacy of the allowance is monitored monthly. At March 31, 2007, the allowance was $3,137,000 which is 63.9% of non-performing loans and 0.48% of total loans, compared with $3,053,000 which was 67.6% of non-performing loans and 0.49% of total loans at December 31, 2006.



At March 31, 2007 non-accrual loans were $4,896,000 compared to $3,893,000 at December 31, 2006. Impaired loans totaled $2,982,000 at March 31, 2007 compared to $2,123,000 at December 31, 2006. The total amount of loans ninety days or more past due and still accruing interest at March 31, 2007 was $14,000 compared to $33 at December 31, 2006. There was a specific loan loss reserve of $262,000 established for impaired loans as of March 31, 2007 compared to a specific loan loss reserve of $150,000 at December 31, 2006. PNBCs management analyzes the allowance for loan losses monthly and believes the current level of allowance is adequate to meet probable losses as of March 31, 2007.



CAPITAL RESOURCES



Federal regulations require all financial institutions to evaluate capital adequacy by the risk-based capital method, which makes capital requirements more sensitive to the differences in the level of risk assets. At March 31, 2007, total risk-based capital of PNBC was 8.79%, compared to 9.18% at December 31, 2006. The Tier 1 capital ratio decreased from 6.33% at December 31, 2006, to 6.14% at March 31, 2007. Total stockholders equity to total assets at March 31, 2007 increased to 6.37% from 6.33% at December 31, 2006.





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LIQUIDITY



Liquidity is measured by a financial institutions ability to raise funds through deposits, borrowed funds, capital, or the sale of assets. Additional sources of liquidity include cash flow from the repayment of loans and the maturity of investment securities. Major uses of cash include the origination of loans and purchase of investment securities. Cash flows used in financing and investing activities, offset by those provided by operating activities, resulted in a net decrease in cash and cash equivalents of $14,125,000 from December 31, 2006 to March 31, 2007. This decrease was primarily due to the payment for the Plainfield acquisition, a net increase in loans and a net decrease in deposits, offset by proceeds from the sales and maturities of investment securities. For more detailed information, see PNBCs Consolidated Statements of Cash Flows.



FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK



The Corporation generates agribusiness, commercial, mortgage and consumer loans to customers located primarily in North Central Illinois. The Corporations loans are generally secured by specific items of collateral including real property, consumer assets and business assets. Although the Corporation has a diversified loan portfolio, a substantial portion of its debtors ability to honor their contracts is dependent upon economic conditions in the agricultural industry.



In the normal course of business to meet the financing needs of its customers, the subsidiary bank is party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the subsidiary bank has in particular classes of financial instruments.



The subsidiary banks exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The subsidiary bank uses the same credit policies in making commitments and conditional obligations as they do for on-balance-sheet instruments. At March 31, 2007, commitments to extend credit and standby letters of credit were approximately $124,998 and $6,339, respectively.



Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The subsidiary bank evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, by the subsidiary bank upon extension of credit is based on managements credit evaluation of the counterparty. Collateral held varies, but may include real estate, accounts receivable, inventory, property, plant and equipment, and income-producing properties.





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Standby letters of credit are conditional commitments issued by the subsidiary bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. The subsidiary bank secures the standby letters of credit with the same collateral used to secure the loan. The maximum amount of credit that would be extended under standby letters of credit is equal to the off-balance sheet contract amount. The standby letters of credit have terms that expire in one year or less.



MERGERS AND ACQUISITIONS



On February 23, 2007, the Company completed the acquisition, for $10.2 million in cash, of the fixed assets and loans while assuming the deposit liabilities of the Plainfield, Illinois branch of HomeStar Bank in order to expand its market presence in this area. The Company financed the purchase price with existing cash and federal funds sold on the balance sheet at the time of purchase.  Since the completion of the merger, the Plainfield location operates as a branch of the Companys subsidiary bank.



The transaction has been accounted for as a purchase, and the results of operations of Plainfield since the acquisition date have been included in the consolidated financial statements.



LAND HELD FOR SALE



In 2004, the Corporation purchased approximately 14 acres of land in Aurora, Illinois in anticipation of the construction of a new branch facility. This construction of the facility was completed in May, 2006 using approximately 55% of the available acreage. The remaining 45% was sub-divided into two lots and needed infrastructure was completed. These lots, with a cost basis of $1,344,000, were determined to be held for sale as of March 31, 2007. A real estate appraisal has been completed indicating the market value of each lot to be approximately $2,000,000. Accordingly, these lots are now shown on the Corporations balance sheet as land held for sale, at the lower of cost or market.



LEGAL PROCEEDINGS



There are various claims pending against PNBCs subsidiary bank, arising in the normal course of business. Management believes, based upon consultation with legal counsel, that liabilities arising from these proceedings, if any, will not be material to PNBCs financial condition.



QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



There has been no material change in market risk since December 31, 2006, as reported in PNBCs 2006 Annual Report on Form 10-K.



EFFECTS OF INFLATION



The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America and practices within the banking industry which require the measurement of financial condition and operating results in terms of historical dollars, without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institutions performance than the effects of general levels of inflation.



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# PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY

The following table sets forth (in
thousands) details of average balances, interest income and expense, and resulting annualized yields/costs for the Corporation for
the periods indicated, reported on a fully taxable equivalent basis, using a tax rate of 34%.

|                                                            | Three Months Ended, March 31, 2007 |  | Three Months Ended, March 31, 2006
|----------------------------------------------------------- | ---------------------------------- |  | ----------------------------------
|
|Average Interest-Earning Assets                             |                                    |  |                                   
|                                                           
|Interest-bearing deposits                                   |                                    |  | $                                 
|Taxable investment securities                               |                                    |  |                                   
|Tax-exempt investment securities                            |                                    |  |                                   
|Federal funds sold                                          |                                    |  |                                   
|Net loans                                                   |                                    |  |                                   
|                                                            |                                    |  |                                   
|                                                           
|Total interest-earning assets                               |                                    |  |                                   
|                                                            |                                    |  |                                   
|                                                           
|Average non-interest earning assets                         |                                    |  |                                   
|                                                            |                                    |  |                                   
|                                                           
|Total average assets                                        |                                    |  | $                                 
|                                                            |                                    |  |                                   
|                                                           
|Average Interest-Bearing Liabilities                        |                                    | 
|                                                           
|Interest-bearing demand deposits                            |                                    |  | $                                 
|Savings deposits                                            |                                    |  |                                   
|Time deposits                                               |                                    |  |                                   
|Interest-bearing demand notes   issued to the U.S. Treasury |                                    |  |                                   
|Federal funds purchased                                     |                                    |  |                                   
|Customer repurchase agreements                              |                                    |  |                                   
|Advances from Federal Home Loan Bank                        |                                    |  |                                   
|Trust preferred securities                                  |                                    |  |                                   
|Note payable                                                |                                    |  |                                   
|                                                            |                                    |  |                                   
|                                                           
|Total interest-bearing liabilities                          |                                    |  |                                   
|                                                            |                                    |  |                                   
|                                                           
|Net yield on average interest-earning assets                |                                    |  |                                   
|                                                            |                                    |  |                                   
|                                                           
|Average non-interest-bearing liabilities                    |                                    |  |                                   
|                                                           
|Average stockholders equity                                |                                    |  |                                   
|                                                            |                                    |  |                                   
|Total average liabilities and                               |                                    | 
|stockholders' equity                                        |                                    |  | $                                 
|                                                            |                                    |  |                                   

The following table reconciles
tax-equivalent net interest income (as shown above) to net interest income as reported on the Consolidated Statements of Income.

|                                      | For the Three Months EndedMarch 31,
|------------------------------------- | -----------------------------------
|
|Net interest income as stated         |                                    
|Tax equivalent adjustment-investments |                                    
|Tax equivalent adjustment-loans       |                                    
|                                      |                                    
|                                     
|Tax equivalent net interest income    |                                    
|                                      |                                    

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Schedule 7.   Controls and Procedures



(a)
        Disclosure controls and procedures. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2007. Our disclosure controls and procedures are the controls and other procedures that we designed to ensure that we record, process, summarize and report in a timely manner the information we must disclose in reports that we file with or submit to the SEC. Tony J. Sorcic, President and Chief Executive Officer, and Todd D. Fanning, Senior Vice-President and Chief Financial Officer, reviewed and participated in this evaluation. Based on this evaluation, Messrs. Sorcic and Fanning concluded that, as of the date of their evaluation, our disclosure controls were effective.




(b)
        Internal controls. There have not been any significant changes in our internal accounting controls or in other factors during the quarter ended March 31, 2007 that could significantly affect those controls.


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INDEX TO EXHIBITS



ExhibitNumber
        Exhibit31.1
        Certification of Tony J.
Sorcic required by Rule 13a-14(a).31.2
        Certification of Todd D.
Fanning required by Rule 13a-14(a).32.1
        Certification of Tony J.
Sorcic required by Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.32.2
        Certification of Todd D.
Fanning required by Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.


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